Rising Oil Prices Become Economic Concern

Oil and gas prices continue to rise on the fear factor. If the Strait of Hormuz, a vital passage, was closed, oil and gas prices would likely soar to all-time highs. Photo: REUTERS

Amid a U.S. economy that's slowly improving, with unemployment rates creeping lower and business inventories rising, a new economic concern is on the horizon: rising oil prices.

The focus has been on threats from a Eurozone crisis and rippling impact and U.S. politics grappling with debt but oil prices climbed to $100.14 a barrel in New York on Tuesday, and most experts think the price minus a dip here and there will only go higher. The price had spiked even higher in the day on a rumor that Iran might close the Strait of Hormuz, disrupting supplies from the Persian Gulf. The nation's Foreign Mininistry later said that report was false, calming the market a bit.

Americans aren't paying the price at the pump yet in accord with the higher prices, so most aren't concerned with the rising oil price yet. Due to weak consumer demand in America, refineries have been forced to drop prices as the price for a barrel of crude has risen. The average price per gallon averaged $3.269 in the past week, according to AP, some 15 cents less than last month and 29 cents cheaper than one year ago.

But that trend is not likely to continue, since the double edge of the improving economy means that with rising prices, one demand for gas at the pump returns prices per gallon will move higher. They are likely to remain there in 2012, if not beyond, say many experts which could threaten the recovery.

Last month the International Energy Agency said in its World Energy Outlook that If, between 2011 and 2015, investment in the [Middle East and North Africa] region runs one-third lower than the $100 billion per year required, consumers could face a near-term rise in the oil price to $150/barrel.

The last time that happened prices at the pump went well beyond $4 per gallon, and over $5 in many regions.

Henry Blodget wrote earlier this month in Business Insider that the last time, Specifically, $100+ oil caused many Americans to buy different cars and drive less. And it put a choke chain on the economy, throttling growth. And, shortly thereafter, the economy tanked.

And then, of course, oil prices followed the economy down, allowing everyone to focus on other more pressing emergencies.

Consumers may also get squeezed on airline tickets, since a spike in rising jet fuel prices could force carriers to raise the cost of fare. Goldman Sachs recently forecast that the price of Brent crude will reach $130 a barrel in 2013, with the price of U.S. crude reaching $126 a barrel.

We continue to view the crude oil market as navigating between the currently tight physical oil markets and the threat that the European debt crisis could trigger a global economic recession in the near future, which would lead to a sharp drop in oil demand, Goldman Sachs analysts said in a note.